What this line means
Interest you paid on money borrowed to buy or hold taxable investments. The most common example is margin interest charged by your brokerage. Investment interest is deductible only up to your net investment income for the year. Any excess carries forward to future years. This deduction is calculated on Form 4952.
Does this apply to you?
- You borrowed on margin from your brokerage account and paid interest on the margin loan
- You took out a loan specifically to purchase stocks, bonds, or other taxable investments
- You had investment interest expense that was limited in a prior year and carries forward
Easy to overlook
You can elect to treat qualified dividends as investment income Normally, qualified dividends are taxed at the lower capital gains rate. But if you need more investment income to deduct your investment interest, you can elect to treat qualified dividends as ordinary income. This increases your deductible investment interest but also increases the tax rate on those dividends. Run the numbers both ways. 1 IRS Form 4952 instructions
Margin interest from stock trading is deductible If your brokerage charges margin interest for leveraged stock trading, that interest is deductible investment interest. Margin interest on crypto trading may also qualify, though IRS guidance on crypto-specific margin interest is limited since crypto is treated as property rather than a security. Your brokerage reports margin interest on your year-end statement, though it is not always on a 1099. Check your account statements for the total margin interest paid. 2 General filing pattern — margin interest deduction
Watch out for this
Deducting investment interest that exceeds net investment income. The deduction is capped at your net investment income (interest, non-qualified dividends, short-term capital gains). If you paid $5,000 in margin interest but only had $2,000 of investment income, you deduct $2,000 this year and carry the remaining $3,000 forward.
Footnotes
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IRS Form 4952 Instructions, Investment Interest Expense Deduction. https://www.irs.gov/instructions/i4952 ↩
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IRS Schedule A (Form 1040) Instructions. See also IRS Publication 17, Your Federal Income Tax. https://www.irs.gov/pub/irs-pdf/p17.pdf ↩